The idea for how to divide risk into different currency pairs is when you establish the general direction of a particular currency pair and then rely on the strengths and weaknesses of the two currencies so that we can choose the pairs. Compatible coins can join transactions.

Example: You have identified a strong downtrend in USD / JPY, then this will be the base currency pair to set up our currency basket. If the overall trend of USD / JPY is bearish, it means that JPY is strengthening. See trading chart below:

As such we can focus on JPY-related pairs. Instead of just buying USD / JPY, you can also sell GBP / JPY, EUR / JPY, and AUD / JPY as well. As shown below:

If you were going to take a 4% risk against the USD / JPY pair, you can now take 1% risk if trading the above pairs.

However, this approach has a major downside, that is, you need to define the market context correctly. If you choose the wrong trend, you will surely fail.

However, the way to disperse risk in this article will remove this factor for you. Now we go into the strategic content.

Step 1: Determine the trend of USD

A market structure or technical indicator can be used to determine a trend. As shown below, the USD is strengthening:

Step 2: Select the currency pairs that are related to the USD

Traders need to identify which currency pairs demonstrate the strength of the USD and which do not.

The only two currency pairs that benefit the most from the strength of the USD are the AUD / USD and EUR / USD. Meanwhile, USD / CAD and GBP / USD did not move much, not highlighting the strength of the USD. As the picture below shows:

What we need to do is buy currency pairs that demonstrate the strength of the USD and sell pairs that have failed. And at this point, the risk will be split evenly across all the currency pairs you trade.

The trading order execution will be as follows:
  • Sell EUR / USD (-2 pips loss)
  • Sell AUD / USD (-3 pips loss)
  • Sell USD / CAD (loss -16 pips)
  • Buy GBP / USD (loss -27 pips)
After the first trading day, the total of all positions is -50 pips. But after 10 days the results are as follows:
  • Sell EUR / USD (+79 pips)
  • Sell AUD / USD (+105 pips)
  • Sell USD / CAD (loss -80 pips)
  • Buy GBP / USD (loss -14 pips)
In total, we profit +90 pips.

As you can see, we do not need to be too concerned about the trend, just grasp the currency to create a basket of currencies and how to trade risk-spread to the currency pairs to trade.

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